Surprise! China Stocks Are May's Best Performers

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Asia's infamous stock market laggard seems to have regained a little swagger in May.

Even as most major global markets managed to shake off the "sell-in-May" syndrome to finish higher for the month, it's China that's taken the lead position in the gains.

The benchmark Shanghai Composite was up almost 6 percent for the month, far outperforming Asia's major markets, including Japan's volatile Nikkei which was down 0.6 percent in May.

In comparison globally, the benchmarks - Dow Jones Industrial Average and the S&P 500 - are both up over 3 percent this month, while FTSE EuroFirst 300, a broad measure of European stocks, is higher by 2 percent.

But China's May performance has baffled market watchers, who think going ahead there might be little positive trigger for Chinese stocks.

Paul Krake, founder of View from the Peak: Macro Strategies, a trading strategy firm, cannot find a reason for this rally.

(Read More: China Stocks: Why Goldman Likes This Market Laggard)

"There's no fundamental news that has pushed this, literally in the first four months of the year, it was a structural underperformer," Krake said. "So, is it a short squeeze? [Referring to sellers being forced to close short positions as the market bounces higher] There's not been any policy response [either]."

A series of negative economic data out of China in the past month, like a contraction in factory activity for the first time in seven months and weak export growth, have added to fears that the recovery in the world's second-largest economy may be losing steam. Plus, both the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) cut their 2013 growth forecasts for China this week.

(Read More: Why the IMF Might Be Wrong on China)

Policymakers have yet to respond with any recent measures to boost growth.

Adrian Mowat, chief Asian and emerging market equity strategist at J.P. Morgan, said policymakers in China are "completely boxed in" the economy and as a result stocks wouldn't necessarily benefit from more stimulus.

"They [policymakers] have to manage inflation pressures, rising wages, rising property costs and we're finding that throwing lots of money at this economy isn't generating a lift," Mowat said, referring to the $157 billion of stimulus spending in September 2012, which did lift growth towards the end of the year, but China's full-year annual growth of 7.8 percent in 2012 was the weakest since 1999. In the first quarter of 2013 again growth unexpectedly slowed to 7.7 percent year on year.

According to Mowat, there is a huge contradiction in the Chinese market: "There are stocks in China that are up over 40 percent year-to-date and then there are some that are down 40 year-to-date," Mowat added.

(Read More: Will the China Investor Snap Up US Stocks? Maybe Not)

Krake of View from the Peak said structural problems have led investors going away from Chinese stocks this year as focus shifts to Japan.

"Everyone is so focused on Japan, that primarily China really is a sideshow," Krake said. "I think we have a credit block in the next two years, I think that the book value of banks is grossly overstated, profitability is about to collapse."

Japan's benchmark Nikkei is up nearly 29 percent so far this year, while the Shanghai Composite is only higher 1 percent in the same time period.

— By CNBC.com's Rajeshni Naidu-Ghelani; Follow her on Twitter @RajeshniNaidu